My colleague Greg Brennand and I attended an excellent presentation today by Robert E. Ward, J.D., LL.M., hosted by the Estate Planning Council of Vancouver.
Mr. Ward shared valuable information for Canadian parents who wish to protect their U.S.-based children's inheritance from potential claims by ex-spouses, creditors, and the IRS. Mr. Ward discussed as follows:
Key Differences Between U.S. and Canadian Tax Systems
The U.S. and Canadian tax systems have fundamental differences that impact estate planning. Most importantly, the U.S. Internal Revenue Code operates independently from Canada's Income Tax Act, with its own unique approach to taxing wealth transfers.
U.S. Transfer Tax System Overview
The United States maintains three distinct wealth transfer taxes:
- Gift Tax - Applied to transfers made during your lifetime
- Estate Tax - Applied to transfers made at death
- Generation-Skipping Transfer Tax - Applied to transfers that skip a generation
Unlike income taxes, these are wealth transfer taxes based on the entire fair market value of assets being transferred, not just the gains. This means the full value of the gift or bequest is potentially subject to taxation.
U.S. Estate Tax Considerations for Canadians
A key concept to understand is that U.S. estate tax is generational - wealth is taxed repeatedly as it moves from one generation to the next. Additionally, these taxes are typically imposed on the transferor (the person giving the assets), not the recipient.
Who's Subject to U.S. Estate Tax?
You don't need to be a U.S. citizen or resident to face U.S. estate tax exposure. If you own U.S. situs assets (assets located in or connected to the U.S.), you could face estate tax liability on those assets at death.
U.S. Situs Assets Include:
- Tangible personal or real property located in the United States
- Shares of U.S. corporations
- Debt obligations of U.S. persons (with some exceptions)
Estate Tax Exemption Amounts
The exemption amounts vary significantly based on your status:
- U.S. Citizens/Domiciliaries: $13,990,000 in 2025 (note that this temporarily doubled amount sunsets on December 31, 2025)
- Non-U.S. Citizens/Non-Domiciliaries: Only $60,000, unless eligible for treaty benefits
Canadian residents may benefit from treaty provisions that provide a proportional credit based on the ratio of U.S. assets to worldwide assets:
Treaty Credit = U.S. Estate Tax Credit × (U.S. Assets ÷ Worldwide Assets)Treaty Relief and Limitations
The Canada-U.S. Tax Convention provides relief from U.S. estate taxes but offers no protection from:
- U.S. gift tax
- U.S. generation-skipping transfer tax
However, there is a per-transferee annual exclusion for gift tax purposes ($19,000 USD for gifts made in 2025).
Exit Tax Considerations
If your child has U.S. citizenship or long-term resident status and later decides to renounce their status, they may face the "exit tax" - a mark-to-market tax on unrealized gains if they meet certain criteria:
- Average annual net income tax liability exceeding $206,000 (for 2025) over the preceding five years
- Net worth of $2,000,000 or more
- Failure to certify tax compliance for the preceding five years
Life Insurance Planning Considerations
Life insurance requires special planning considerations when U.S. beneficiaries are involved. Two major pitfalls include:
- Increasing the denominator in the treaty fraction (potentially reducing the available credit)
- Creating a taxable estate for the recipient
Effective Estate Planning Strategies
To protect your U.S.-based children's inheritance, consider implementing a trust-based estate plan that addresses:
- Protection from creditors
- Protection from ex-spouses in case of divorce
- Reduction of estate tax exposure
- Appropriate life insurance ownership structures
When customizing the U.S. estate plan, consider:
- Selecting a trust protector
- Choosing appropriate trustees
- Defining trustee discretion regarding investments and distributions
- Designating remainder beneficiaries
Conclusion
Estate planning for Canadian parents with U.S. children requires navigating complex cross-border tax considerations and taking advantage of available treaty benefits. Working with advisors experienced in both Canadian and U.S. tax systems such as Mr. Ward is essential to protect your children's inheritance from unnecessary taxation and potential claims.
Given the temporary nature of certain U.S. tax provisions and the pending sunset of increased exemption amounts after 2025, reviewing your estate plan regularly is crucial to ensure it remains optimized for changing tax landscapes.
Recognized by Best Lawyers in Canada for trusts and estates and family law, she previously chaired the Canadian Bar Association Wills and Trusts Subsection (Vancouver).
Contact Nicole by email or phone at (778) 742-5005
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